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According to transition economics, a branch of neoclassical orthodoxy, the transformation of East European banks mostly into a foreign-bank dominated banking system – served as a disciplining tool to break the links between banks and incumbent, formerly state-owned enterprises and thus the cycle of non-performing loans, bank recapitalisation and inflation.

How did this actually happen?

Comparing ownership patterns in 1997 and 2005 across transition economies shows the enormous transformation banking sectors across the region have gone through. In 1997, eight transition economies still had predominantly government-owned banking systems, while 11 had banking markets dominated by domestic privately-owned banks. There were only five countries with predominantly foreign-owned banks, notably Bulgaria, Estonia, Hungary, Macedonia, and the Slovak Republic. Two thirds of countries in 2005 had banking systems dominated by foreign banks, with only four countries retaining predominantly government-owned banking systems and six having banking systems dominated by domestic private banks. With the notable exception of Slovenia, where domestic private banks constitute the largest component of the banking market, all new EU countries and Croatia are dominated by foreign banks. In 2005 the ratio of foreign-owned assets in total banking assets reached over 80% in Bosnia, Lithuania, Croatia and the Slovak Republic and almost 100% in Estonia and Hungary. Foreign-owned banks provide 90% of the credit to non-bank residents in emerging Europe compared to 30% in developed Europe.In contrast, the foreign share is less than 20% in emerging Asia. In relation to advanced economies, the foreign bank share is around 25% for the EU and the US (but less than 5% for Japan).

From this standpoint, only Eastern Europe and Sub-Saharan Africa look like enclave financial systems.